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HNC/HND BUSINESS

HNC/HND BUSINESS

Fiscal
Policy, a very vital part of economics, is referred to as the government
spending as well as revenue collection of a country. • Fiscal Policy has two
main instruments that are;

• Government spending

• Taxation.

• There are certain changes in the composition and level of government spending
and taxation that impact the following variables in the economy of a country:

• Aggregate demand and the level of economic activity.

• Resource allocation pattern.

• Distribution of income.

• The overall effect of the budget outcome on an economic activity is termed as
Fiscal policy of a country. There are three particular stances regarding the
fiscal policy of a country that are; neutral, expansionary and contractionary:

• A neutral stance regards a balanced budget where “Government spending = Tax
revenue” (G = T). The government spending is funded by tax revenue and the
overall effect of the budget outcome is neutral on the economic activity.

• Expansionary stance of the fiscal policy denotes a net increase in Government
spending (G > T) through rises in government spending or a fall in taxation
revenue or a combination of the two. The effect usually leads to a larger
budget deficit or a smaller budget surplus than the Government previously had,
or a deficit if the Government previously had a balanced budget. Expansionary
fiscal policy is mostly associated with budget deficit for an economy.

• Contractionary fiscal policy (G < T) involves the reduction of the
Government spending through higher taxation revenue or reduced Government
spending or the combination of the two in such a way. This leads to a lower
budget deficit or a larger surplus than the Government previously had, or a
surplus if the government previously had a balanced budget. Contractionary
fiscal policy is usually associated with a surplus.

Funding Methods

• The government spends money on a wide variety of things, from the military
and police to services like healthcare and education, as well as transfer
payments that stand as welfare benefits. This expenditure can be funded in a
number of ways:

• Taxation

• Benefit from printing money

• Borrowing money from the population that results in a fiscal deficit.
• Consumption of reserves.

• Sale of assets i-e land etc.

• There are two ways for the budgeting to go, one is that the Government will
face deficit, and the other, it will face a surplus, these are the basic form
of effects the Government spending have of course.

Deficit

• A fiscal deficit is often funded by issuing secure bonds such as treasury
bills. These pay interest, either for a fixed period or indefinitely. The
nation may default on its debt if the interest and capital repayments are too
large. This is how a Government funds the deficit.

Surplus

• A fiscal surplus is usually saved for future use, and may be invested in
local instruments, till needed. When income from taxation or other sources
falls, usually during an economic crash, reserves allow Government spending to
continue at the same rate, without gaining additional liabilities.

Economic Effects of Fiscal Policy

• Fiscal policy is used by governments to influence the level of aggregate
demand in the economy, in an effort to achieve economic objectives of stability
in the price of goods, employment and the economic growth of the country.
Keynesian (John Maynard Keynes) economics suggests that increasing or
decreasing the Government spending and the tax rates to stimulate aggregate
demand as a favourable outcome. • This is usually used in times of recession or
low economic activity as an essential tool in providing the framework for
strong economic growth and working toward full employment. The Government
usually implements such deficit-spending policies due to its size and
reputation and stimulates trade. In theory, these deficits would be paid for by
an expanded economy during the boom that would follow. • During high economic
growth periods, budget surplus is usually used to decrease activity in the
economy. A budget surplus will be implemented in the economy if inflation is
high, in order to achieve the objective of price stability. According to
Keynesian theory, the removal of funds from the economy will reduce levels of
aggregate demand in the economy and contract it that will bring stability in
the price level.